Businesses must be able to accurately predict or forecast events that affect the economic state of the business. Accurately predicting demand for a product, for example, is necessary in order to match production with demand. Underestimating demand results in lost sales. Overestimation of demand results in unrealized sales and associated carrying costs. Changes in business policies may undesirably impact the actual demand and the certainty of any predictions in demand and thus the financial state of the business.
Types of policy changes that can result in changes to the financial state of the business include but are not limited to sales pricing changes, advertising changes, and return policy changes. Lowering the price of the product directly, providing a rebate to the customer, or providing financial incentives to the seller are examples of sales techniques that may affect sales, returns, and profits. Accurately predicting the effect of policy changes is critical to the financial well-being of the business. Ideally the business would like to accurately predict consumer behavior with respect to its services or products in view of sales, advertising, returns, rebate, warranty, or other policies.
Although the economic effect of policy changes can be tested in the actual marketplace, such testing may result in significant costs to the business in the case of failure. The business may experience significant financial loss, lost sales, and lost market share when the policies are tested is in the actual marketplace. Thus the cost of experimentation may be exorbitant. Moreover, the product life cycle of some products may be so short that experimentation is futile. By the time an optimal policy is identified, the product has been obsolesced.
Instead of testing policies in the marketplace, simulation software may be used to model the business. Various experimental economics simulation software packages have been developed to model specific types of business organizational structures and the economic effects of policies supporting those organizational structures. One disadvantage of such systems is that they have limited ability to simulate types of business processes and models that are not already pre-defined within the software package. For example, an auction based software simulation system cannot simulate the effects of return policies.
Another disadvantage of these systems is their limited adaptive flexibility. If a process or policy rule is changed, substantial programming may be required to effect the appropriate change in software code. Rule substitution, modification, elimination or introduction is generally not possible without significant programming effort. Generally, the experimenter must choose the individual software package that most closely matches the business processes. Significant policy changes may otherwise require a change of experimental economics simulation software packages.